Future grim for Alberta, DBRS says, with province expected to blow through debt limits this year

The Toronto-based agency DBRS, in a report issued Thursday, says with oil prices so low and the government’s borrowing plans so high, Alberta will exceed its own self-imposed legislated debt limits this fiscal year.

The agency confirmed Alberta’s top-drawer triple-A credit rating, but said the future is grim.

“The negative trend reflects DBRS’s expectation that the continued weakness in oil prices will contribute to a material erosion in the province’s fiscal performance and accumulation of debt,” said the DBRS report.

“DBRS believes that the fiscal response is unlikely to be adequate to maintain credit metrics consistent with the AAA rating, in particular maintaining a DBRS-adjusted debt burden below 15 per cent of GDP,” it added.

“Debt is now expected to exceed 15 per cent of GDP as early as (fiscal) 2016-17.”

Alberta, under a law passed last year by Premier Rachel Notley’s NDP government, cannot borrow so much money that the total exceeds 15 per cent of its gross domestic product.

Finance Minister Joe Ceci has said that 15 per cent limit is critical to ensure that future generations of Albertans are not saddled with crippling debt payments.

But he has noted other provinces take on as much as 30 per cent.

Notley’s government, in its first budget last October, ramped up infrastructure spending to $34 billion over the next five years despite the low price of oil.

A drop in rating reflects a loss of confidence in debt management and leads to higher borrowing costs.This is the second time in less than two months that DBRS has weighed in on Alberta’s economy.

In its last report, issued on Nov. 30, 2015, DBRS affirmed Alberta’s triple-A rating and said the NDP budget plan was “manageable,” but warned that continued deterioration in oil prices “would be cause for concern.”

Ceci, in a statement, said the province is sticking with the long-term plan introduced in the October budget.

“Our government will work to find efficiencies, but we will not make reckless cuts that would simply make a bad situation worse,” said Ceci.

The NDP plans to continue to modestly hike spending in key areas like health and education in the upcoming years. Hiring restrictions are in place, but Ceci says he won’t engage in widespread cuts to front-line services.

The infrastructure spending is to help spur economic growth and create jobs while taking advantage of low interest rates to catch up on Alberta’s infrastructure deficit.

Notley’s team has also launched numerous programs and plans to diversify the economy.